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Phases Of Business Cycle

 Phases of Business Cycle

A typical cycle is generally divided into four phases:

  1. Expansion or prosperity or the upswing
  2. Recession or upper turning point
  3. Retrenchment or depression or down swing
  4. Revival or recovery or lower turning point
  • These stages are recurring and consistent in the case of diverse cycles. But no phase has definite periodicity or time interval.

  • As noticed by Pigou, cycles may not be twins but they are of the same family. Like families they have widespread characteristic features that are competent of explanation.

  • Commencement at the channel or below point, ac cycle bypasses through a recovery and wealthy stage increases to a peak declines through a recession and depression stage and reaches a trough.


            Consequently, the levels of employment, earnings and productivity augment steadily in the fiscal system. In the prior phases of the revival stage there is considerable excess or idle capacity in the fiscal economy so that productivity hikes devoid of a proportionate hike in aggregate costs.

            However, as phase goes on productivity becomes less elastic, restricted access, appear with rising costs deliveries are trickier and plants may have to be extended. Under these stipulations, prices rise.


            In the wealthy stage, demand, productivity and earnings are at a high level. They are likely to raise prices. But remuneration such as salaries, wages, interest rates rentals and taxes do not rise in proportion to the rise in prices.

The lag among prices and costs hikes the margin of profit. The hike of profit and the prospect of its persistence usually cause a quick rise in stock market values. The fiscal system is overwhelmed in waves of positivism.


            Recession marks the turning point during which the forces that make for retrenchment finally win over the forces of extension. Its outward signs are liquidation signs are winding up in the stock market, strain in the banking system and some winding up in bank loans and the beginning of the diminish of prices.

            Consequently profit margins decline further for the reason that costs begins overtaking prices. Some firms wind up. Others diminish production and try to sell out accumulated stocks.


            Recession then merges into depression when there is a general refuse in fiscal performance. There is considerable deduction in the production of goods and services, employment, earnings, demand and prices. The common refuse in fiscal performance tends to a drop in bank deposits. Credit extension ends for the reason that the business society is not willing to borrow.

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